NEWS
A hard market will endure until more capital flows in: Guy Carp
On new and improved earnings, traditional reinsurers could stack up next $50bn capital to 2025.
Attracted by the continued hard market conditions, new capacity is entering the industry. But it is not enough to patch up gaps in cedant demand and comes with pricing expectations that mean prices will not soften, top executives at reinsurance broker Guy Carpenter have claimed.
“We are starting to see some capital come in, but not nearly at the quantum that will dilute the current situation,” David Priebe, Guy Carpenter’s chairman, told a briefing ahead of the Monte Carlo Rendez-Vous. “We expect capital will come in, but that capital is expecting continued discipline.”
For traditional reinsurers, plenty of capital is on hand, just waiting to be tempted into play by the right prices and conditions. Guy Carpenter says rising profitability helped traditional reinsurers increase capital by some 12 percent in H1 as the industry’s total tally of dedicated capital rose to some $560 billion, up 5.6 percent in 2023 to levels comparable with those of the end of 2021.
Return on equity is now firmly above the industry’s average cost of capital, with recent rate gains still earning their way into profits. Stretch projected earnings into further capital generation and Guy Carpenter sees another $50 billion added to the capital base by the end of 2025, Lara Mowery, the broker’s global head of distribution, said.
Cat bonds represent the outlier bright spot in the industry’s attempts to garner new and fresh capital. Mowery sees “significant appeal” for third-party investors on account of defined peril terms the deals offer and other “certainty features” that solve some key industry headaches around terms and conditions.
“The growth of the 144A market will continue to accelerate as a complement to the traditional reinsurance market,” Priebe told briefing participants.
“Cedants have had more time to adapt this time around.”
Lara Mowery, Guy Carpenter
Cat bond issuance during the first half of 2023 was $9.2 billion from 41 issues, figures that beat any prior H1 on record and included seven debutante issuers. A majority of issues were oversubscribed and priced with spreads within or below guidance.
“The bottom line is a very healthy deal flow as cedants adjust to relatively flat demand from traditional reinsurers,” Mowery said.
The demand side of the equation may also have adjusted since last year as cedants have looked to hike insurance rates, adjust policy terms and re-manage concentrations.
But that could mean different things, Mowery warned. It could mean that some cedants are better able to fund reinsurance out of premiums and maybe bargain for a better deal. Or it could mean cedants are better able to manage risks and can handle higher retentions. “Cedants have had more time to adapt this time around,” she said.
Meanwhile, despite signs of a broader rebound in property capacity, the lower layers of reinsurance programmes lost during the 2023 renewals aren’t coming back soon—with few exceptions.
“Those retention expectations broadly still hold true for reinsurers now that these adjustments have been made,” Mowery claimed of her talks with reinsurers. “That is something of a baseline for their expectations.”
For those seeking to recapture lost lower layers, she noted that there is some interest from a small number of reinsurers and investors in developing new solutions underneath the newly hiked retentions.
Main image: Shutterstock / Katvic